In many American rural areas, crucial community development services are provided by community development corporations, or CDCs.

In many American rural areas, crucial community development
services are provided by Community Development Corporations (CDCs). These nonprofit,
community-based organizations do invaluable work but receive little national attention.

When the Urban Institute estimated several years ago that 1,700 CDCs serve
rural areas in the United States, the number astounded even industry experts.
Despite their low national profile, rural CDCs are a tremendous resource for the
revitalization of rural areas and small towns, and about 100 CDCs serve such communities
in the Ninth Federal Reserve District.

Some rural CDCs produce more results
than others do. The ability to produce results is often called capacity. A current
term in the field of community development is "capacity building," which
means increasing the ability of an organization to accomplish its goals.

In
this article, we examine the components of capacity that enable a CDC to reach
its goals and offer examples of rural CDCs that have solved various capacity problems.
The CDCs that we cite in our examples serve rural areas, including Indian reservations,
in five Ninth District states. These organizations are all members of the Rural
Local Initiatives Support Corporation (Rural LISC) network.

CDCs make an impact in communities they serve

Rural CDCs are active in a variety of programs. In 1998, the National Congress
for Community Economic Development surveyed 1,079 CDCs that serve rural areas.
According to the survey, these CDCs had developed or financed more than 83,000
housing units, repaired another 66,000, and developed more than 6 million square
feet of commercial/industrial facilities, as of 1997. They also invested $274
million in business development and assisted nearly 9,500 small businesses.

Components of capacity: A discussion framework

To discuss capacity,
we use a framework developed in the article "More Than Bricks and Sticks:
Five Components of Community Development Corporation Capacity" by Norman
J. Glickman and Lisa J. Servon of Rutgers University. Glickman and Servon's framework
divides capacity into five components: organizational, programmatic, network,
political and resource.

Organizational capacity: Work efficiently and effectively

Success
of a CDC depends on the effectiveness of its executive director and board and
their ability to manage growth. Also crucial are the competence and stability
of staff members in delivering services and their effectiveness in handling fiscal
and project management.

For a CDC to fulfill its goals, its leaders must
have a vision of those goals and be willing to change the CDC in order to pursue
them.

For example, Impact Seven, Inc. (I-7) has a mission of revitalizing
Wisconsin communities through job creation. For several years after its inception,
I-7 worked in various aspects of economic development, filling development "holes"
as they became apparent.

According to Bill Bay, I-7 president, "We
found too few good deals to accomplish our goal of community revitalization so
we decided to take a different approach. We decided to figure out how to organize
a community for economic development action."

For this purpose, the
CDC picked Almena, Wis., a town of 625, where agriculture was depressed and retail
businesses were losing ground to regional commercial centers. This initiative,
later called the "Almena Idea," not only resulted in the revitalization
of Almena and national awards for I-7, it created a model of what it takes for
a community to revitalize itself. By staying focused on its goal of revitalizing
communities, I-7 now knows what revitalization requires from a community and what
kind of help a CDC should offer.

This example illustrates another aspect
of CDC leadership: risk-taking. Several CDC leaders interviewed for this article
said that a CDC must be willing to fail.

Jeff Rupp, executive director of
Human Resources Development Council (HRDC), which serves three Montana counties,
offers this advice to CDCs: "Don't be afraid. Accept the challenges and just
do it." Several years ago, city leaders in Bozeman asked HRDC for its help
in solving the city's affordable housing crisis. Although all of its prior experience
was in the delivery of human services, HRDC decided to tackle the housing problem
and used its savings for this initiative.

The risks to HRDC—both financial
and reputational—were high. The result, however, was worth the risks. The city
of Bozeman now has a land trust housing development that includes affordable housing
for purchase and rent, and HRDC now has locally and nationally recognized expertise
in land trust housing development. Taking such risks requires that the CDC have
strong leaders who can keep the organization on the path set in the vision, even
if the CDC experiences a failure with one of its programs.

Vision and leadership
are not enough to ensure an organization's success. It must also be well-managed;
that is, able to deliver its services efficiently and effectively. According to
Bob Poznanski, program director of the North and Midwest regions of Rural LISC,
CDCs must adopt a businesslike mentality. He notes, "A CDC must be managed
as well as, if not better than, a for-profit business." Nonprofit funders
often scrutinize the operations of CDCs much more closely than do the funders
of for-profit enterprises. Thus, CDCs must hire staff with the flexibility to
change as the organization changes and offer them appropriate training.

Rural
CDCs typically are more visible in their communities than their urban counterparts.
As a result, organizational capacity issues faced by rural CDCs may play out much
more publicly than those faced by urban CDCs.

On the other hand, anecdotal
evidence suggests rural CDCs have an advantage in staff and leadership stability.
Although rural CDCs may have difficulty finding staff with required specialized
skills, they may be more successful at retaining the staff they have hired. Staffers
at rural CDCs—especially key program staffers—appear to stay with the organization
longer than staffers at urban CDCs. According to Glickman and Servon, continuity
of leadership and staff is closely linked to a CDC's goal attainment. In other
words, the most stable organizations are the most effective.

Programmatic
capacity: Offer useful programs

Rural communities have many community development
needs: affordable housing; infrastructure such as water and sewer lines, parks
and community facilities; living-wage jobs and venture capital and debt financing
for small businesses and the delivery of human services.

Whichever needs
a CDC addresses and whatever programs it offers, it must possess the skills, experience
and funding to deliver quality programs. Often, newer or less financially stable
CDCs decide which programs to offer on the basis of funding availability. For
example, Midwest Minnesota Community Development Corporation (MMCDC) was established
in 1971 when the Mahube Community Action Program, which served three counties
at the time, obtained funding for a specialty crop program. MMCDC president Arlen
Kangas notes, "Until we got established financially, we followed the funding.
Then we were able to follow the needs." From its modest beginnings, MMCDC
has grown to its current capacity—serving seven counties and providing a wide
range of economic and housing development programs.

When a CDC structures
its programs, it must be certain to address the critical issues and needs of its
service area. For example, many CDCs offer microbusiness loan programs, which
are often needed when very small businesses lack access to capital. CDCs usually
provide these loans at below-market rates. Of course, the business is grateful
to pay less than market-rate interest for the loan, and the lower cost of debt
may also decrease the risk associated with the business. Nevertheless, offering
loans at below-market rates decreases the number of loans that a CDC can make.
CDCs must look at the business reason for any program feature.

As a CDC
gains experience and funding, its mission and vision may lead it into new program
areas. The safest areas are closely related to the original programs. A CDC might
branch out from offering homeownership counseling to offering a revolving rehabilitation
loan fund.

Sometimes the mission of the CDC leads it into a program area
that is quite different from the organization's original focus. For example, MMCDC
concentrated its early efforts on economic development. As in many rural service
areas, its communities soon found that the increase in manufacturing jobs, created
in part by the efforts of the CDC, resulted in a need for affordable housing.
To support its efforts at expanding economic activity, MMCDC needed to make housing
production a priority.

In another instance, Northern Initiatives (NI), which
serves Michigan's Upper Peninsula, found that more than half the borrowers in
its loan program were producers in the wood products industry. Although CDCs usually
focus on general business practices and not on specific industries, NI decided
to become more knowledgeable about the wood products industry and now has a research
and development initiative at work on industry-wide problems.

In such a
situation, a rural CDC likely has no local contacts to offer advice on operating
programs in a new area. "In my experience," says Rupp of HRDC, "people
at CDCs in rural areas are very bright but they are isolated and need people to
talk to." National organizations such as the Housing Assistance Council and
the Neighborhood Reinvestment Training Institute offer training in the operation
of specific types of community development programs. Also, the CDC may want to
contact CDCs in other areas for advice, using the Stand Up for Rural America Campaign
directory of rural CDCs or the United States Department of Agriculture's Rural
Development "Success Stories" Web page as resource guides.

In this development in Detroit Lakes, Minn., Midwest Minnesota
Community Development Corporation used several creative financing approaches to
construct 18 affordable homesapproximately three-fourths of which were sold
to first-time homebuyers.

Network capacity: Forge
partnerships, reach out

To succeed, a CDC must be willing and able to work
with other institutions. Especially in small communities where there are fewer
resources, both financial and human, all parts of the community must work together
toward common goals. For example, Southwest Minnesota Housing Partnership (SWMHP)
resulted from a partnership between a public regional development commission and
three private, nonprofit organizations. The groups came together because, separately,
they lacked the finances and capacity to tackle housing problems in their area.

Partnerships
often enable CDCs to leverage funds or other resources. Northeast South Dakota
Economic Corporation (NESDEC), the sister organization of Northeast South Dakota
Community Action Program, administers a business loan fund. This CDC formed partnerships
with other local loan funds so that its portion of a typical loan package is only
about 50 percent, with other loan funds and banks lending the remaining 50 percent.
To leverage its resources, Michigan's NI works with local colleges, encouraging
them to develop programs on work force development and help realize NI's goal
of keeping Upper Peninsula businesses competitive.

Many CDCs have formed
partnerships with financial institutions to facilitate joint programs, such as
microloan funds.

Typically, the CDC offers partial financing of or a guarantee
for bank financing of a small business, and it must build relationships with local
banks before they will participate in these types of programs. NESDEC has working
partnerships with about 60 local banks.

Bob Hull, executive director of
NESDEC, places heavy emphasis on building relationships with local banks. "Banks,"
he notes, "are the permanent institutions in the community that have the
resources to fill long-term demand for business financing." Often, these
relationships are critical to innovative programs. Rupp of HRDC comments, "We
could not have done the land trust single family homes without the local banks'
willingness to make these mortgages, even though they could not be sold in the
secondary market."

A single organization cannot address all the community
development needs in an area, nor should it try. Many CDCs have found they can
advance their own goals by helping other development organizations in the community.
I-7 has learned that creative and effective partnerships are vital to sustaining
development and private investment throughout Wisconsin. Since 1970, this CDC
has worked with localities to establish more than 100 local associations and cooperatives
in support of community economic development in its service area.

A CDC
must reach outside the community—not only for funding, but also for technical
and other nonfinancial assistance. NI describes its president's job duties as:
"Uses extensive experience in the support of private and public partnership
projects to build the strategies and collaborations that support NI's efforts
and work."

With few or no professional peers in the community, leaders
of rural CDCs often feel isolated. To combat this isolation, visionary CDC leaders,
managers and board members often find technical assistance and psychological comfort
in reaching out to community development networks.

The Red Cliff Band of Lake Superior
Chippewas (Red Cliff Band), located on a narrow strip of shoreline on Wisconsin's
northernmost point, knows the problem of being isolated. Although this tribal
government technically is not a CDC, the Red Cliff Band took the unusual step
of applying for inclusion in the Rural LISC network. As a result, the Red Cliff
Band gained access to this network of other community development organizations
and obtained information on development approaches that can be adapted for use
on the reservation.

Also, CDC staff may benefit from attending conferences
and training sessions on rural development issues. These activities take time
from day-to-day management and sometimes consume precious funds, but they may
make the difference between an organization that continues to grow and one that
stagnates.

Southwest Minnesota Housing Partnership is the owner and developer
of this 24-unit rental community, a low-income housing tax credit development
in Luverne, Minn.

Political capacity: Seek,
build community support

The successful rural CDC has a high level of credibility
inside its community, and political leverage on the outside. It has educated constituents
and partners and can manage conflicts arising from multiple community interests.

To
ensure that its strategies and programs reflect the priorities of its service
area, a CDC must seek the active involvement of those it serves. Roni Monteith,
vice president of NI, notes, "Community development is not just a matter
of producing houses or jobs. Only the community can determine the right sets of
activities."

In recognition of that idea, SWMHP's policy holds that
it must be invited into a community before it will undertake development projects.
Then the CDC and community leaders work together to determine what kind of development
will best meet the needs of the community, using the housing expertise of SWMHP
staff and input from housing studies or other market data.

Without the active
support of the community members for which it advocates, a CDC cannot seek the
support of public policymakers, other CDCs, and funders. Community members and
partners must understand the importance of the CDC's community development efforts
and the role of public and private partners in advancing these efforts. The ideal
is for community members and partners to advocate on behalf of community development
in general and the CDC in particular. Achieving an informed and active citizenry
usually requires that CDC leaders be as adept at educating and leading the community
as they are at developing it. Kangas of MMCDC observes, "I think that as
I've gotten better at working with the community leaders, they've gotten smarter."

Rural
CDCs, as an industry, have been hampered by a lack of visibility outside their
communities. This harms rural CDCs because funding goes primarily to visible programs.

Rural
CDCs often lack the venues available to their urban counterparts, such as exposure
in big-city newspapers and the attention of large urban institutions like banks,
corporations and foundations. A rural CDC working alone cannot build the type
of political influence needed, and each CDC must do its part by regularly contacting
its congressional representatives, state legislators and "state beat"
reporters from large newspapers in the region. CDCs can also increase their political
leverage by banding together to form coalitions and supporting the efforts of
national initiatives such as the Stand Up for Rural America Campaign. (See "A
Conversation With" for more information.)

A rural CDC may find
that representing the interests of a small community is more difficult than working
in an urban community. The urban CDC often defines its mission and constituency
quite narrowly, such as serving the housing needs of residents in a particular
low- to moderate-income neighborhood. The rural CDC often has a broader mission
and constituency, such as that of MMCDC—its mission is to provide capital and
technical assistance to promote job creation, economic diversification and housing
development in seven Minnesota counties. According to Bay of I-7, "A CDC
in rural areas has to be a jack-of-all-trades."

Broad missions and
diverse constituencies often translate into conflicts regarding goals and strategies.
The successful CDC must remain aware of these competing interests and become adept
at balancing diverse demands. Conflicts arising from a CDC's community involvement
can be resolved in ways that strengthen relationships among community leaders
and create more effective programs. Bay observes, "CDCs sometimes have to
be the irritant so the pearl is formed."

Through its certificate of deposit pledge program, Northeast
South Dakota Economic Corporation helped the owner of this retail store in
Sisseton, S.D., obtain a loan to purchase the building and the business.

Resource capacity: Keep finances in order

Access
to financial resources is vital to the success of any enterprise. However, CDCs
must be able to manage funds as well as raise them. According to Poznanski, "Most
failures of CDCs result from funding and financial management difficulties. Typically,
CDCs that failed were overly dependent on a few funding sources, didn't take advantage
of available federal funding, lacked solid financial management skills and didn't
develop administrative and business support functions within the organization."

Since
CDCs usually operate on tight budgets, financial management must be solid and
financial statements must reflect the true position of the organization. More
than one CDC has failed because the board and the leaders of the organization
did not recognize the severity of its financial deterioration. Securing and following
the advice of an outside auditor is crucial to the financial viability of a CDC
in this situation. Saving for a rainy day often seems unimaginable to a CDC. However,
without a cushion, the CDC is subject to financial distress that results if funders
change their priorities or delay their payments.

Successful CDCs operate
like private businesses. Furthermore, funders want to fund a stable CDC—one that
is not overly dependent on one or two sources of income and instead explores as
many sources of funding as possible, and one with a cushion to get it through
emergencies. NESDEC is an excellent example.

NESDEC has built permanent
capital, which represents 30 percent of its assets available to lend or to pledge
as guarantees on bank loans.

NESDEC has established a variety of funders.
Over the last 21 years, 30 percent of the capital in the CDC's permanent reserve
was funded by the federal Community Service Block Grant Program and other federal
grant programs, foundations, utilities, local development corporations, churches,
social investment funds and retained earnings from interest and fees charged to
its clients. The other 70 percent of capital currently comes from relending programs
offered by three federal government agencies and three national, private community
development intermediaries.

NESDEC has created a source of financial strength
and stability in its permanent capital, funded in part by retained earnings, and
has built a wide range of funding relationships—both within and outside of its
community—representing both governmental and private sources.

Federal funds
play an important role in CDCs and can provide the stable source of income that
is needed to attract other funders. State funds also can fill this role, but the
availability of such funds often depends on the visibility of rural CDCs within
the state.

The hardest funds for a CDC to raise are operating funds. Newly
formed CDCs may have initial success raising these funds, but a CDC must have
a plan for generating operating capital long after seed funds are depleted. Some
CDCs become self-supporting, or able to cover their operating costs through fees
and interest charged to program clients. Other CDCs cover only part of these costs.

One
school of thought says that CDCs should work toward self-sufficiency, but should
not sacrifice their ability to do innovative programs. As Lisa Onken, SWMHP loan
officer, observes, "CDCs are supposed to try things—things that may fail
or take a long time to pay their own way." She notes that if innovative programs
were easy to do, others would be doing them.

With coaching from Northern Initiatives, the fabrications
division of Argonics, a synthetic rubber products manufacturer in Marquette, Mich.,
performs a complete operations reengineering to improve product quality and decrease
costs and delivery times.

Flexibility and interactions

No
matter what area of community development a CDC is targeting, Glickman and Servon
found that a CDC that is flexible, or responsive and resilient, fares better than
one that lacks these attributes. CDC leaders must expect changes in the environment
and be prepared, if only mentally, to respond. In addition, a CDC must have the
resources, both financial and psychological, to bounce back from reversals, adapt
and keep its vision and goals in mind.

Crucial interactions exist among
the five components of capacity building, and Glickman and Servon discuss this
in their article. A CDC cannot attract resources without first developing community
networks, political know-how, organizational skills and programs that address
constituent needs. Similarly, an effective organization facilitates fund raising,
expansion into new program areas, increased networking and political connections.

Although the components of capacity building are interconnected parts of
a whole, recognizing them separately offers CDCs a starting point for making improvements.
In some organizations, starting with political capacity may be crucial. In others,
organizational capacity might be the most logical place to focus initial efforts.
Recognizing these interconnections offers CDCs a caution that deterioration in
one area should be stemmed before it affects other areas, but it also provides
hope that advances in one area will flow into the others.